In 2019, the cost of borrowing for a payday loan must not exceed $ 15 for every $ 100 borrowed. This rule may lead users to believe that the interest rate on their investment is 15%, but this is not the case.
Interest is typically calculated over one year. Banks, credit unions, and credit card companies usually charge an annual interest rate, regardless of the repayment period.
Payday lenders do not express the cost of borrowing as an annual interest rate. Instead, they set a fixed amount for the entire repayment term, which is shorter than a year.
The time to pay off a payday loan usually ranges from 14 to 28 days; it can be up to 62 days at most. Therefore, the cost of borrowing is equivalent to a much higher annual interest rate than 15%.
The following table shows what the annual interest rate would be for a $ 100 loan, the cost of borrowing would be $ 15, depending on the number of days you would have to repay the loan.
For example, if you use your credit card to purchase $ 400 and the annual interest rate is 15%, then the interest will total about $ 5 per month or $ 60 per year.
On the other hand, if you borrow the same amount from a payday lender who asks you to pay him $ 60 every 14 days, your loan will cost you around $ 129 per month or $ 1,543 per year.
The payday lender may also ask you to pay interest on the total amount you owe him if you don’t pay it back on time. Check-in your loan agreement how much you will have to pay if you exceed the scheduled repayment date. The lender can apply an interest rate as high as 60% from the time your balance is due. In the end, your loan could cost you dearly.
If you use your credit card instead to get a cash advance, the interest rate is likely to be higher than the usual annual rate, but the final cost of borrowing will be lower than if you are dealing with a payday lender.
If you need money for a short period, use a credit card instead; your loan will cost you much less than if you take out a payday loan. There may also be other solutions to your money problems. For example, you could consult a credit counselor from a nonprofit agency.
No doubt, Payday loan is the best solution for getting emergency funds. But it can be so risky in some situation. If you have caught in payday trap you can seek help for your payday loan consolidation.